Returns On Capital Signal Tricky Times Ahead For Shatirah House Restaurant (TADAWUL:9520)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shatirah House Restaurant (TADAWUL:9520), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shatirah House Restaurant:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.071 = ر.س6.6m ÷ (ر.س146m - ر.س52m) (Based on the trailing twelve months to June 2023).

Therefore, Shatirah House Restaurant has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

Check out our latest analysis for Shatirah House Restaurant

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shatirah House Restaurant's ROCE against it's prior returns. If you're interested in investigating Shatirah House Restaurant's past further, check out this free graph covering Shatirah House Restaurant's past earnings, revenue and cash flow.

What Can We Tell From Shatirah House Restaurant's ROCE Trend?

On the surface, the trend of ROCE at Shatirah House Restaurant doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 36% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

In summary, Shatirah House Restaurant is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 43% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Shatirah House Restaurant, we've spotted 5 warning signs, and 1 of them is significant.

While Shatirah House Restaurant isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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